Power Point Slides to accompany Basic Bookkeeping Seventh

Chapter 1 An Introduction to Bookkeeping Copyright © 2015 by Nelson Education Ltd. 1

Chapter 1: An Introduction to Bookkeeping Chapter Objectives After completing this chapter, you will be able to: • define three forms of business organization • define the five categories of accounts: assets, liabilities, owner’s equity, revenues, and expenses • classify accounts according to the five categories • identify the generally accepted accounting principles Copyright © 2015 by Nelson Education Ltd. 1 -3

Chapter 1: An Introduction to Bookkeeping • What is bookkeeping? • Keeping track of money-related activities for an individual or a business • What kinds of money-related activities? • • • Cash received Cash paid out Sales Purchases Others activities Copyright © 2015 by Nelson Education Ltd. 1 -4

Chapter 1: An Introduction to Bookkeeping • Personal Bookkeeping • Bookkeeping for Business • Cash received • Cash paid out • Things owned • Debts owed • • • Cash paid out Sales Purchases Things owned Debts owed Copyright © 2015 by Nelson Education Ltd. 1 -5

Chapter 1: An Introduction to Bookkeeping Financial Statements: Balance Sheet • The balance sheet shows what you own (assets) and the debts you owe (liabilities). Owner’s Equity is the difference between assets and liabilities. Copyright © 2015 by Nelson Education Ltd. 1 -6

Chapter 1: An Introduction to Bookkeeping Financial Statements: Income Statement • The income statement shows the revenue (income) earned and the operating costs incurred. Net income is the difference between revenue and costs. Copyright © 2015 by Nelson Education Ltd. 1 -7

Chapter 1: Three Forms of Business Organization Every business is one of the three forms of business organization: • Proprietorship • Partnership • Corporation Copyright © 2015 by Nelson Education Ltd. 1 -8

Chapter 1: Three Forms of Business Organization Proprietorship • A business with only one owner • The owner is the manager, the owner makes all the business decisions, and the owner is responsible for all the liabilities of the business Copyright © 2015 by Nelson Education Ltd. 1 -9

Chapter 1: Three Forms of Business Organization Partnership • A business owned by two or more persons (called partners) • The partners share the management and decision-making • Each partner is responsible for the debts of the business Copyright © 2015 by Nelson Education Ltd. 1 -10

Chapter 1: Three Forms of Business Organization Corporation • A business that operates under a government charter • Owners are called shareholders or stockholders Copyright © 2015 by Nelson Education Ltd. 1 -11

Chapter 1: Five Classes of Accounts Every business divides its accounts into five classes:

Chapter 1: Five Classes of Accounts Assets • Things of value, owned by the business • Examples include cash, buildings, equipment, merchandise for sale Liabilities • Debts owing to others • Examples include credit cards, bank loans and mortgages Owner's Equity • The value of assets that remains after all debts have been paid off Copyright © 2015 by Nelson Education Ltd. 1 -13

Chapter 1: Five Classes of Accounts Revenues • Earnings from the sales of goods and/or services to customers • A business can have more than one kind of revenue. Expenses • Costs of operating the business • Examples include rent, salaries, electricity, water, advertising, etc. Copyright © 2015 by Nelson Education Ltd. 1 -14

Chapter 1: Five Classes of Accounts Assets versus Expenses Assets • Contribute to the current operating year and to the following year (or years) Expenses • Contribute only to the current operating year Copyright © 2015 by Nelson Education Ltd. 1 -15

Chapter 1: GAAP All accountants follow the same practices and procedures (the same rules) in how they record accounting activities and report accounting information. These “rules” are called the Generally Accepted Accounting Principles (“GAAP”). They help to ensure that all accounting information is fair, free from bias, and reliable. Copyright © 2015 by Nelson Education Ltd. 1 -16

Chapter 1: GAAP A brief description of Generally Accepted Accounting Principles: • Business Entity Concept • Accounting for the business must be kept separate from the affairs of the owner • Continuing-Concern Concept • Assumes the business will continue operations without interruption • Conservatism Principle • Information must be fair and reasonable • Values must not be overstated or understated Copyright © 2015 by Nelson Education Ltd. 1 -17

Chapter 1: GAAP • Objectivity Principle • Transactions must be based on objective evidence. • Each transaction must have a verifiable source document to prove when it happened, what it was for, and how much • Time-Period Concept • Each transaction will relate to a specific financial period (a specific month or a specific operating year) • Recognition Principle • Revenue is recognized when it has been earned, whether the money has been received or not. Expenses are recognized when they have been consumed, whether paid for or not Copyright © 2015 by Nelson Education Ltd. 1 -18

Chapter 1: GAAP • Matching Principle • Related to the Recognition Principle • Each expense must be recorded in the same financial period as the revenue it helped to earn • Cost Principle • Related to the Objectivity Principle • Purchases must be recorded at their cost price • Consistency Principle • The same accounting principles must be used period after period, year after year Copyright © 2015 by Nelson Education Ltd. 1 -19

Chapter 1: GAAP • Materiality Principle • GAAP principles must be followed unless the value of a transaction is considered insignificant (immaterial) • Full-Disclosure Principle • All information about a company's financial situation must be included in the financial statements Copyright © 2015 by Nelson Education Ltd. 1 -20